SiriusXM Stock Surge May Not End in 2012

Already, analysts deserve a pat on the back for sticking with their fundamental expectations for the company, and in particular, its relationship with large minority shareholder Liberty Media (LMCA).

When SiriusXM shares fell below $2 earlier in 2012, analysts highlighted changes in the company's relationship with Liberty Media and a recovery in its earnings, balance sheet and cash flow as reasons to stick with the stock.

After SiriusXM reported strong user, earnings and cash flow growth in its second-quarter results on Aug. 7 and Liberty Media subsequently bolstered its stake in the company to nearly 50% in September, the Wall Street optimism appears vindicated.

On Tuesday, SiriusXM touched a new 52-week high of $2.85 intraday, pushing the company to its highest level since the financial crisis.

Three years after Liberty Media caught the market bottom with a 40% stake in SiriusXM, investors and analysts entered 2012 with the prospect that the easy money had been made on the company. New analysis indicates there's still reason to remain optimistic.

Liberty Media gained its SiriusXM stake as a result of a $530 million loan it provided the satellite radio company in 2009. A standstill agreement that prevented Liberty Media from increasing its SiriusXM stake for three years expired in early 2012. In March, a petition with the Federal Communications Commission paved the way for Liberty Media to build its stake in SiriusXM towards control, which it's done in recent stock purchases.

Overall, the company has 3.83 billion shares, meaning that its Thursday afternoon share price of $2.85 still gives SiriusXM a near-$11 billion market cap.

SiriusXM's second quarter earnings were highlighted by a 170,000 year-over-year increase in subscriber additions on the heels of a 16% rise in new vehicle sales, as well as used car service reactivations and lower churn, according to Kraft. The company's conversion rate held at 45%.

Prior to SiriusXM's share slump in June and July, David Joyce of Miller Tabak and Martin Pyykkonen of Wedge Partners highlighted conversion rates and used car subscriptions as unheralded catalysts for SiriusXM's earnings, even in the absence of M&A.

Pyykkonen said in an April interview that the used car market may double the company's satellite services in the next three to five years. With SiriusXM just beginning to leverage used car dealer networks to convert previously installed satellite chips into new subscribers the company may have a strong base of prospective subscribers even if new car sales don't maintain current growth rates, as General Motors (GM) and Ford (F) show continued U.S. vehicle sales strength.

Meanwhile, analysts also highlight SiriusXM's growing cash flow. In 2011, SiriusXM turned free-cash-flow positive after burning cash throughout the financial crisis and just recently raised monthly subscription prices for the first time in the company's history.

In the second quarter, cash flow generation trends accelerated. Free cash flow grew over 30% in the quarter to $253 million, compared with 2011, adding to year-over-year growth from the first quarter.

Interested in more on Sirius? See TheStreet Ratings' report card for this stock.

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-- Written by Antoine Gara in New York

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